Fed looks past Katrina, raises rates again

Martin Wolk Chief economics correspondent • Profile • E-mail

The Federal Reserve raised short-term interest for an 11^th straight time Tuesday, saying the after-effects of Hurricane Katrina have increased near-term economic uncertainty but "do not pose a more persistent threat."

Policy-makers led by Fed Chairman Alan Greenspan raised the benchmark overnight lending rate by a quarter-percentage point to 3.75 percent, its highest level in more than four years.

Although the move was expected, stock prices fell sharply as many investors were disappointed the Fed indicated more rate hikes are likely, using language virtually unchanged from recent past statements. Many Wall Street traders had hoped the Fed would use Katrina as an excuse to remove or change the language, but instead the central bank reiterated its long-standing position that "policy accommodation can be removed at a pace that is likely to be measured."

The Dow Jones industrial average, which had been in positive territory before the Fed's rate announcement late in the session, fell 77 points or 0.7 percent to close at 10,482.

Diane Swonk, chief economist for Mesirow Financial in Chicago, said the Fed statement was "a bit more hawkish" than she would have expected, especially with Hurricane Rita heading into the Gulf of Mexico, once again roiling energy markets.

"Once they got the uncertainty of Katrina out of the way they just got back to their boilerplate statement," Swonk said.

Under the direction of Greenspan, the Fed’s policy-making Open Market Committee has raised short-term rates a quarter-point at every scheduled meeting since June 30, 2004, when the overnight federal funds rate stood at a 46-year low of 1 percent.

While most of the rate hikes have been approved by a unanimous vote of the 10-member panel, Tuesday's move was opposed by Fed Gov. Mark Olson, who preferred to leave rates unchanged. Swonk said the rare opposition by a Fed governor was a sign of likely intense debate over the long-term impact of Katrina.

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